To be honest , the market was in dire need for correction, BUT wonder where we will be when companies starts reporting their quarterly results and impact of that.
So far this looked more like a correction than a precursor to the recession. To make things worse, OPEC dropped bombs which spread the wildfire further..
High P/E ratio, bearish fixed income market, companies unable to deploy capital and buying back stocks to sustain bull market, QE being drained out, etc. Lots of warning signs that we are at the top of the cycle.
Take this with a train of salt because I’m not an economist, but one of the most often touted general points of the need for a correction is the cyclically adjusted price to earnings ratio being elevated [1].
In other words, stocks are more “expensive” and thus ripe for a correction
Note that that's the Shiller P/E ratio, which (even after today) is still at 26, which is quite high. The regular P/E is still only around 20, which is at the upper limit of reasonable.
The whole point of the Shiller ratio is that it's supposed to do a better job predicting overheated markets, and it may well be doing that here. The regular ratio is based on recent earnings, which will be uncharacteristically high during a bull economy.
That's not to say it's incorrect. I was just noting that your link indicated a higher value than I was expecting, and that's why. (It implies that the market could easily fall another 25% before reaching reasonable territory.)
Correct. I deliberately chose the longer CAPE terminology because I thought it was more descriptive than the term Shiller PE. But thank you for adding a better explanation
Definitely, especially in light of a probable recession.
One possible enhancement to the PE ratio I've read about that seems really helpful is to make it after tax, since the tax rate on companies can vary depending on locality and time.
I am not the original poster but I think they are expressing that we were ready for some reversion to the mean after many years of gains including a spectacular 2019.
Plot a basic best fit line for the DJIA or S&P 500 over the last 30 years and see where it says we should be in a rational market (about another 10% below today). If you need more evidence, plot a second line showing GDP growth for comparison. The markets have been in an unprecedented situation for the last decade since the Fed cut rates to the bone and then left them there. Effectively, money has been so "easy" that all kinds of weird things have been happening to boost the markets without much actual underlying structural support (actual capital investment, median wage growth, GDP output, etc.).
It's widely known state of things because of the current situation (low interest rates for very long time, etc.). Infact, many financial institutions and experts have been of the idea that a major stock crisis was around the corner for a while.
You could argue that most would have disagreed, but at the end 2018 many stock crisis indicators, models and statistics started to turn red and indicate that a crash was close.
2019 had a couple of close calls like the Turkish lira crisis, but there was never widespread panic to feed a worldwide crash. Now there is.
I don't know about "need" and I'm no kind of expert, but it seems to me that there's a hard drop roughly every ten years or so and the last one was 12 years ago. I've only been in the market myself for about 15 years, so I don't know that I have the instincts to call it, but historically this seems to be true.
I'm having trouble seeing how those two positions/statements contradict each other. If markets need a correction, and then they get it, that is part of the business cycle.
Also, "at this point" is at the point of one of the most runaway bull markets of all time. IMO, the correction has been needed for a couple years now. I didn't have nor did I see that sentiment on HN 5+ years back.
The market has just been unhinged lately, because there are a lot of huge positions that would love to sell but just can't unwind. Consequently there has not been an effective downward pressure on asset prices, and a lot of garbage is overpriced.
I still don't expect a major correction here because there's so much underused capital flying around out there and it will pour into anything that looks even remotely like a bargain. We have entered a regime where the world's economies have more capital than they are willing to use, which is novel and weird. Expect markets to act in novel and weird ways.
One thing I can easily predict is American governments large and small will take the wrong actions. They will cut taxes and slash spending when the bond markets are begging them to spend more. States and cities should be out there right now selling as many bonds as they can.
Huh, this was a ton of speculation in 3 paragraphs. Could you expand on what are the huge positions that are looking to sell? Are there any examples of overpriced equities?
I think your second paragraph makes sense given some large cap companies holding so much cash on hand due to inability to find anything useful to invest in (and stock buybacks)./
Bonds have both an income return and price return component. If interest rates go down, Treasuries go up in price. TLT (20+ Year Treasury ETF) has been up nearly 20% since this bout of panic set in.
Oil dropping because an opec monopoly explodes is good news for most of the economy (outside of oil industries obviously). But a drop in crude because of demand is bad for everybody.
no - oil dependent companies bought oil futures to hedge their price risk, so you shouldn't expect much benefit there. additionally, the high yield bond sector has a ton of energy company exposure, and those are falling through the floor. an extended price war could really obliterate those bonds, and their lenders.
So far this looked more like a correction than a precursor to the recession. To make things worse, OPEC dropped bombs which spread the wildfire further..